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Macro issues of micro lenders

Macro issues of micro lenders
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First Published: Sun, Oct 17 2010. 09 26 PM IST
Updated: Sun, Oct 17 2010. 09 26 PM IST
In the past three months, India’s microfinance industry has been in the limelight for the right and wrong reasons. First, SKS Microfinance Ltd, the nation’s biggest player in the business of giving tiny loans to poor people, got its shares listed. The public float that raised Rs1,654 crore was subscribed 13.69 times and in six weeks after its listing it rose some 51%. Then came the sacking of its chief executive officer Suresh Gurumani. Meanwhile, the finance ministry has been insisting that the interest rates charged by the microfinance institutions, or MFIs, are very high and they must be lowered. Although the ministry has made it clear that it has no intention of capping interest rates, in a recent note to public sector banks financial services secretary R. Gopalan asked them to ensure that MFIs, particularly large and well-established ones, charge their borrowers reasonable rates, around 22-24%. The Andhra Pradesh government has gone one step ahead and issued an ordinance last week to regulate MFIs. The objective is to force MFIs—and the southern states have too many of them—to disclose the methods they use to recover money and justify the high interest rates they charge their borrowers. It also proposes to set up fast-track courts across the state to deal with MFI-related issues. The Indian central bank discussed this at its Chandigarh board meeting last week and set up a committee to look at critical issues such as funding of MFIs and interest rates.
SKS Microfinance, in many ways, is responsible for all this action. Huge investor interest in the stock has not only excited a few other MFIs—such as Share Microfin Ltd and Spandana Sphoorty Financial Ltd—to consider listing on the bourses, but also made lenders to these institutions jealous of its success. SKS has so far disbursed Rs16,670 crore through 2,286 branches across 34 districts and to 7.3 million consumers. Its return on assets is 4.91% —far higher than any Indian bank. When a corporate client borrows money from banks and uses the money to make profits and repay the loans, the banks feel happy. But when an MFI makes huge profits by on-lending the borrowed money, they don’t like it. The government and the regulator, too, start looking at the success in a different light. After all, SKS Microfinance was set up as a non-profit organization.
The migration of a non-profit organization to a listed entity that needs to continuously strive to create value for shareholders is not easy and nobody knows this better than SKS Microfinance’s founder-chairman Vikram Akula. He blames Gurumani’s inability to handle the changing dynamics of the microfinance industry after the firm’s initial public offer for his sacking.
What had changed between 16 August, when SKS listed, and 4 October, when Gurumani was shown the door? The public float, according to Akula, had brought into the limelight certain issues that were difficult for its “clients at the grass roots to understand”. When an MFI engaged in creating “social capital” needs to hit the capital market, its chief executive officer must explain all these to its borrowers and apparently Gurumani was not up to the task.
Akula also says SKS Microfinance is now preparing for the “second phase of growth” which will consist of secured lending such as mortgages and loans against gold, and M.R. Rao—who has succeeded Gurumani—and himself with 20 years of experience in this sector, would be the best team to lead SKS Microfinance. Incidentally, Gurumani is a career banker who previously worked at Barclays Plc and Standard Chartered Bank.
In his interaction with the media last week in Mumbai, Akula used a lot of jargon to explain Gurumani’s ouster, but at best his explanation on what led to Gurumani’s sacking was clumsy and unconvincing, and at worst non-transparent.
This is the biggest problem with India’s fledgling MFI industry that has seen a tremendous growth in the past three years. Some of them are doing pretty well, expanding business and making good money and yet they don’t want to talk about their business model, margins, and other aspects and any news report on them that doesn’t eulogize their work is treated with cynicism as if it’s an infringement of their privacy. Many of them suffer from a persecution complex.
I noticed this at a recent MFI conference in Mumbai.
At one of the sessions, on media and microfinance, a private equity investor accused the Indian media of being utterly irresponsible and inaccurate and sensationalizing trivial issues (to be fair, he did say Mint is unique and doesn’t do such things).
The founder of an MFI, another panellist, said reporters had set ideas on what they should write and are always looking for “negative” stories. He even narrated one incident when a reporter was looking for a story on the impact of a petrol strike on the MFI sector. Apparently, the reporter believed that with the strike, the field staff of most MFIs would not be able to use their bikes and hence collect money from borrowers. Typically, MFIs collect debt repayments from borrowers weekly and even daily. His firm’s employees didn’t stop going to the field because of lack of petrol, but still the report appeared quoting some other person. Indeed, there could be instances of reporters being driven by some preconceived notions or even of not showing enough responsibility, but this does not prevent MFIs from being transparent and and educating the media on their business. The industry leaders, like film stars, receive awards frequently at various functions. Often they spend more money on a meal in a five-star hotel than what they give as loan to a single borrower. They handle big money, millions of consumers and make profits. Why do they want to hide facts?
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email your comments to bankerstrust@livemint.com
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First Published: Sun, Oct 17 2010. 09 26 PM IST